To learn the importance and types of insurance
What is Insurance?
Insurance is a contract between two parties – insured and insurer.
An individual or a company that gets insurance is called insured and the individual or company that provides insurance cover is called an insurer.
Insurance provides financial coverage in the case of any underlying events such as death or medical treatment of the insured.
Sum assured
Sum assured is the value of the insurance cover provided at the time of buying the insurance policy.
For example, Mr. A wants to buy insurance of Rs. 10 lakh from a company named ABC. In this case:
- Rs. 10 lakh is the sum assured.
- Mr. A is the insured.
- ABC is the insurer.
An insurer gives insurance cover to the insured when:
- The event (for which the insurance has been purchased) occurs.
- On the maturity of insurance scheme.
Policy term
Any insurance plan is bought on the basis of a term which is called “policy term.” The insurer decides the policy terms and sum assured.
Premium
A company charges a premium for providing insurance. An insured person pays a premium to the insurer in exchange for insurance cover.
2. Types of Insurance
i. Life Insurance
It is a contract in which the insurer promises to pay a designated beneficiary money in exchange for a premium on the death of an insured person.
Almost every common man buys life insurance. A person insures his life to financially support his family in event of his death.
Life insurance is of two types:
a. Life insurance - traditional plan
In this, a person buys a life insurance cover from a company in exchange for a premium. Insurer gives the insurance cover in two cases:
- In case of death of the Insured person: In this case, a family member of the insured person gets the insurance cover.
- On maturity: In this case, the insurer or family member gets the insurance cover along with interest after completion of the maturity period. Usually, the interest rate for this plan is 6-7%.
b. Term insurance plan
In term insurance plan, the insured has to pay a minimum premium till the term period of the policy.
If the insured person dies before the term completion, the insurer provides the sum assured to his family. However, if the insurance achieves maturity/term period, the insured person does not get any money.
c. Traditional plan vs term insurance plan
In a traditional plan, you get your money back after the maturity while in a term insurance plan, your money lapses.
ii. Health Insurance
Apart from life insurance, people also purchase health insurance to meet financial requirements during any health emergency. Every person should buy health insurance which is also called medi claim cover.
There are many different health insurance plans such as there are separate health insurance plans for COVID-19, cancer, and other diseases.
iii. Travel Insurance
A person buys travel insurance for covering unforeseen losses incurred while travelling, either internationally or domestically. People, who frequently travel, usually buy travel insurance.
iv. Accidental Insurance
This is a type of insurance wherein the insured is paid directly in case of an accident that leads to injury or disability. People, who work in factories or construction sites, always buy accidental policies.
v. General Insurance
Other insurances, apart from the above-mentioned insurances, are called general insurance. People buy general insurance as per their requirements.
3. Insurance Myths
i. Saving instrument:
Many people treat insurance as a savings instrument.
The fact is that insurance is not a saving instrument, it is a financial cover for any event.
ii. No requirement
- Many people think that their future is safe so there is no requirement for insurance and they do not buy it.
- This attitude is wrong because the future is uncertain.
4. Factors for Choosing the Right Insurance Plan
i. Investment capacity
- Choosing an insurance plan depends on your investment capacity.
- If you want to pay less premium, then you should buy a term insurance plan.
- If you can pay more premium, and want to save as well while being invested in an insurance cover, then you should go for a traditional insurance plan.
ii. Earning members
- If your family depends on you, then you need more insurance cover. In this case, you should buy term insurance.
- If 2 or more members of your family are earning, then you should buy a “mix plan” i.e. both term and traditional life insurances.
iii. Health insurance
- Every person should buy health insurance for himself and his family members.
- If you or your family member falls sick or has a dangerous disease, it adversely impacts your savings, so, health insurance is a must for all.
5. How to Get Insurance Cover?
You should meet different agents who are providing insurance services and discuss the plans as per your requirement. You can also discuss this with your family members.
You can visit policybazar.com wherein you can compare different insurance plans. You should analyse the features of different plans and choose the right one for you.
6. Misselling of Insurance
Insurance agents get commission for selling insurance plans. Therefore, they will suggest plans that give them the highest commission.
You should not necessarily buy the insurance plan, which an insurance agent is suggesting. You should analyse the plan before buying it.
Key Outcomes
- Buy a life insurance plan to support your family after your death
- Choose an insurance plan as per your investment capacity
- Buy health insurance to meet any medical emergency
- Do not treat insurance as a saving instrument